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Countering the Winner's Curse: Optimal Auction Design in a Common Value Model

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  • Bergemann, Dirk
  • Brooks, Benjamin A
  • Morris, Stephen

Abstract

We characterize revenue maximizing mechanisms in a common value environment where the value of the object is equal to the highest of bidders’ independent signals. If the revenue maximizing solution is to sell the object with probability one, then an optimal mechanism is simply a posted price, namely, the highest price such that every type of every bidder is willing to buy the object. If the object is optimally sold with probability less than one, then optimal mechanisms skew the allocation towards bidders with lower signals. The resulting allocation induces a “winner’s blessing,†whereby the expected value conditional on winning is higher than the unconditional expectation. By contrast, standard auctions that allocate to the bidder with the highest signal (e.g., the first-price, second-price or English auctions) deliver lower revenue because of the winner’s curse generated by the allocation. Our qualitative results extend to more general common value environments with a strong winner’s curse.

Suggested Citation

  • Bergemann, Dirk & Brooks, Benjamin A & Morris, Stephen, 2018. "Countering the Winner's Curse: Optimal Auction Design in a Common Value Model," CEPR Discussion Papers 13332, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:13332
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    Cited by:

    1. Bikhchandani, Sushil & Mishra, Debasis, 2022. "Selling two identical objects," Journal of Economic Theory, Elsevier, vol. 200(C).
    2. Yiling Chen & Alon Eden & Juntao Wang, 2021. "Cursed yet Satisfied Agents," Papers 2104.00835, arXiv.org, revised Nov 2021.
    3. David Cerezo S'anchez, 2021. "JUBILEE: Secure Debt Relief and Forgiveness," Papers 2109.07267, arXiv.org.
    4. Saurav Goyal & Aroon Narayanan, 2021. "Ex-post implementation with interdependent values," Papers 2108.09580, arXiv.org.
    5. Lamy, Laurent & Patnam, Manasa & Visser, Michael, 2023. "Distinguishing incentive from selection effects in auction-determined contracts," Journal of Econometrics, Elsevier, vol. 235(2), pages 1172-1202.
    6. Elmar G. Wolfstetter, 2021. "Universal High-Speed Broadband Provision: An Alternative Policy Approach," CESifo Working Paper Series 9014, CESifo.
    7. Laurent Lamy & Manasa Patnam & Michael Visser, 2023. "Distinguishing incentive from selection effects in auction-determined contracts," Post-Print hal-04382099, HAL.
    8. Wolfstetter, Elmar G., 2022. "Universal high-speed broadband provision: A simple auction approach," Information Economics and Policy, Elsevier, vol. 60(C).

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    More about this item

    Keywords

    Optimal auction; Common values; Maximum game; Posted price; Revenue equivalence; Adverse selection; Neutral selection; Advantageous selection;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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